Palmer Square launched on Tuesday its euro CLO debt index. After years without a benchmark, the European market has gained three indices this year — the first was offered by JP Morgan, the second by Deutsche Bank in co-operation with Prytania Solutions.
An index is a welcome addition to a growing, maturing market, although it is not quite clear which benefits each of the three indices bring (or more, depending on who else may be cooking one up).
Having an index to benchmark a fund against is a useful tool for asset managers. It offers new opportunities for trading and helps attract new investors in the market, contributing to liquidity.
Some even hope that it could be one step on the way towards European exchange traded funds of CLOs, a booming product in the US that has not made it across the Atlantic yet.
An index also adds another layer of transparency and credibility to a market that still occasionally struggles with its reputation among people who still associate securitization with the global financial crisis, despite the stable performance of CLOs.
But does the European CLO market need three parallel indices in the long run? Probably not. An index has the biggest impact on the market if it is widely adopted, and the three candidates launched this year all seem to work to a similar methodology.
Deutsche Bank and JP Morgan are covering data on around €200bn of CLOs, roughly 95% of the market. Palmer Square did not specify its number at launch, but could be expected to have a similar scope.
The available data is likely to be imperfect since there is no single marketplace for all secondary sales. Deutsche Bank might have a slight advantage here through its collaboration with Prytania — a bank and an independent data provider could in theory get more pricing colour than a bank alone.
The three come with different pricing models. Deutsche Bank offers four tiers of access from a free level that shows the total returns of the whole market to a premium tier with individualised pricing data. Palmer Square’s index will be available to its clients, but non-clients can get free access for 10 months.
It will be interesting to see if and how the indices differ from each other over time, and which one aligns best with market trends and beliefs.
As yet, it is difficult to tell if one of the three will become the dominant benchmark for the market, and if so, which one it could be. It seems unlikely that several indices will coexist with equal market share.
But for now, having three providers compete to provide the most accurate, most comprehensive, most accessible data can only benefit the market.